Utilities Switch Off Investment in Fossil Fuel Plants

Source: By MARK SCOTT, New York Times • Posted: Friday, June 21, 2013

LONDON — On the outskirts of Scunthorpe in northern England, workers at the large power station known as Keadby 1 are preparing to shut it down at the end of the summer, with the loss of about 40 jobs.

Its owner, the British utility Scottish & Southern Energy, says fluctuations in global energy markets have made the natural gas power plant unprofitable despite a multi-million pound renovation, as demand for electricity has plummeted since the financial crisis.

In response, the company plans to keep Keadby shut down until at least 2015. It has also delayed new energy investments and is planning to close almost a quarter of its fossil fuel power plants, including parts of the Ferrybridge coal power station near Leeds in northern England.

“The kind of decisions S.S.E. is taking is likely to be reflected across the industry in the coming months,” Paul Smith, the utility’s managing director for generation, recently told investors. “The right market signals and support structures need to be in place before we can make the necessary investment decisions.”

European energy companies, struggling to respond to weak demand in a flatlining economy, say they need guaranteed pricing to keep open unprofitable plants or to invest in new ones.

Companies like RWE of Germany and EDF of France are confronting complex challenges. Their revenue is being hit by dwindling demand for electricity and by new wind and solar projects that undercut the price of the energy produced from many fossil fuel plants. At the same time, record-low prices on carbon emissions trading markets, which were introduced to encourage clean and efficient energy production and use, have perversely become a disincentive to investment.

“To make multibillion-euro investment decisions, the carbon price needs to be high enough to make them worthwhile,” said Mark Lewis, the head of European energy research at Deutsche Bank in Paris. “Where the carbon price currently is, no one is going to build power plants.”

To make matters worse, many of the largest energy companies in the European Union find themselves burdened with high debt levels after overspending on acquisitions before the economic crisis took hold. Utilities’ combined net debt has risen almost fivefold, to €300 billion, or $398 billion, over the last decade, according to the research organization IHS Cera.

“The trend of high debt is exacerbated by weak demand and low energy prices,” said Mark Davidson, a director at the ratings agency Standard & Poor’s in London. “Right now, there are too many power plants, so no one wants to invest.”

Europe’s failure to build new plants could have lasting consequences.

Many of the Continent’s aging power stations, particularly those that burn highly polluting coal, are earmarked for closure by 2020 to meet stringent local environment regulations. Without replacements for them, analysts say the European economy may be unable to compete with those of the United States, China and elsewhere.

Analysts at IHS Cera say that European utilities need to spend a combined €1 trillion on new infrastructure like power plants, electricity grids and natural gas storage by the end of the decade just to maintain the current levels of gas and electricity supply.

Without these investments, industrial companies in Europe may face higher energy prices when local economies eventually recover, because of a shortage of new power plants.

“Energy utilities are facing a perfect storm,” said Fabien Roques, a director at IHS Cera. “Countries like Britain, Poland and Belgium will need a lot of investment before 2020.”

Europe’s energy and climate change policies are further complicating matters for the utilities on the Continent.

In a bid to generate 20 percent of the European Union’s electricity from renewable sources by 2020, Germany, Spain and other E.U. countries have provided hefty subsidies to wind and solar farms, which now constitute a sizable minority of daily electricity generation, often surpassing the 20 percent target.

With so much energy coming from renewables, many fossil fuel plants can no longer compete on price. Despite the upfront costs associated with green energy projects, they are inexpensive to run. In contrast, Europe’s gas and coal plants, which also provide backup power when renewables cannot operate, need constant spending on fossil fuels.

The weak financial prospects for many plants are already being felt.

European utilities like E.On of Germany have announced plans to shut down less-polluting natural gas-fired plants that have been undercut by dirtier coal-burning generators benefiting from a flood of low-cost coal imports and low carbon emissions prices.

Policy makers are debating a system of support payments to keep uneconomic power plants open, and analysts say that such a system could be introduced by 2018.

“Companies have to invest, but the current prices are so chaotic,” said Colette Lewiner, an energy and utilities adviser at the consulting firm Capgemini in Paris. “Without long-term signals of energy prices, investment won’t happen.”

Despite the uncertainties, some industry observers say Europe’s energy troubles will eventually be resolved.

The rising output and falling prices of green energy may be part of the problem for fossil fuel generators, but they are part of the solution for energy consumers. Some analysts also expect domestic regulators to eventually create financial incentives for companies to upgrade their creaking infrastructure.

Others cite utilities’ control over how electricity is generated across Europe.

Despite efforts to create more competition, former state monopolies, like the CEZ Group in the Czech Republic, often still hold dominant positions in their home markets. When economic growth returns, they will probably be able to finance investments from the recovery in demand for electricity and natural gas.

“In the long run, there will be more, not less, desire for energy,” said Omar Abbosh, a senior managing director at the consulting firm Accenture in London. “The industry is sitting in a place where people continue to need their products.”